Creating a savings culture in South Africa now more critical than ever

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 9 March 2009

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By Graham Earle, Director in Tax at BDO Spencer Steward


One of the greatest challenges we face in South Africa is the lack of a savings culture. Currently only 4% of our population - or 1,8 million individuals - have positioned themselves to retire financially sound. The other 96 % are more likely to become a burden on the state when they reach retirement. Despite these shocking figures, Trevor Manuel has done little to actively encourage a culture of savings towards retirement. And Government's policy of taxing interest earned on savings is proving to be a disincentive to many.

According to Graham Earle, tax director at BDO Spencer Steward, Mr Manuel increased the interest on tax-free savings from R19 000 in 2009 to R21 000 in 2010 for a taxpayer under 65 years of age and R27 500 in 2009 to R30 000 in 2010 for an individual over 65.

"The increases of 10.52% and 9.09% do not encourage a savings culture in South Africa," he says. "In fact, due to the fact that tax free interest does not allow much exemption, this year and next year the South African taxpayer pay more tax than the previous years."

He says that more and more people are retiring without enough funds to support them. "There are simply too many families reliant on state pensions, and this dependence is growing at rapid rate. This obviously puts a significant burden on Government spending," he says. "However if Manuel had invested in increasing the interest allowances in his latest budget, although it would have cost in the short term, in the long term it would decrease the funding required and would instil a greater discipline amongst many South Africans by building an economy with a savings culture.

Earle believes that the current challenging economic times, will lead many investors to convert their shares to Money Market Funds. "In reality they recognize that they will realize more income in bank interest than they would on the volatile stock market," he says. The risk is that some people may take the plunge and invest in higher risk schemes that are marketed as being more tax efficient and earning higher returns (such as pyramid schemes) but which lead to potentially significant investment losses.

"If Mr. Manuel had created a culture of savings," he says. "It would have prevented the very real risk of investors being prepared to place their savings in high risk investments, and it would have encouraged taxpayers to invest in sound banking institutions and accumulate capital assets towards retirement.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 9 March 2009